Market regulator effectively greenlights manipulation of wholesale prices

Australia’s chief competition regulator has effectively okayed the practice of South Australia’s major energy generators exercising their market power to manipulate wholesale electricity prices in the state.

“I think the energy market does allow people when they’re in that position to price they way they want. That’s how the market works,” Australian Competition and Consumer Commission chief Rod Sims told an energy users’ conference in Melbourne, according to the Australian Financial Review.

“It’s not illegal to use your market power. We should never criticise people for using their market power, because you and I would do it as well,” Sims said.

Indeed, the ACCC forecast exactly this outcome in 2007, when it allowed one of the big three retailers to purchase both the Torrens A and Torrens B gas generators near Adelaide (collectively known as TIP), giving the company control of around 80 per cent of average demand in the state, in addition to its 70 per cent share of the retail market.

In a report on major price pikes that occurred soon after that purchase, in early January 2008, the Major Energy User group said the ability of TIPS to set prices at both ends of the supply chain gives the retailer “an exceptionally dominant” position.

“This allows the raising of pool prices above competitive levels to maximize revenue. It also allows the raising of retail price contracts and the costs of hedge contracts with competing retailers and large customers.”

As the Australian Energy Regulator noted in a report released on Thursday briefly analysing the winter price spikes across Australia, such events were common before the build out of wind and solar in many states, particularly in South Australia.
Ironically, when the advent of wind and solar in South Australia in significant numbers pushed the wholesale price down, one retailer argued that the method of assessing wholesale price costs should be changed to the long run marginal cost of generation. It won, after threatening to pack up its business and leave the state.

According to the AFR, Sims quoted “studies” that suggested that once renewable got to a certain level in a market “it causes issues”.

The AFR quoted him saying the rapid expansion of renewable wind and solar energy in South Australia had created problems for traditional fossil fuel generators because it came onto the market at zero cost, and some players had sold their gas to Queensland’s liquefied natural gas industry.

“There’s just less players around. And those people left standing may well have contingent market power because they’re needed at certain times,” Sims said.

© 2016 Solar Choice Pty Ltd

Giles Parkinson

Giles Parkinson regularly contributes unique content to Solar Choice News. Giles is the founder and editor of clean energy industry news service RenewEconomy. He is a journalist of 30 years experience, a former Business Editor and Deputy Editor of the Financial Review, a columnist for The Bulletin magazine and The Australian, and the founding editor of Climate Spectator.
Giles Parkinson